Costs and a systematic instalment

A systematic instalment spreads your purchases across time. It does not improve the assets you buy, and it does not remove the need to ask what they cost. This chapter puts the fee and the instalment in the same worked example.

What the instalment does

You invest ₹10,000 on the same date each month, regardless of the headlines. When the NAV is lower, the same rupees buy more units. When it is higher, they buy fewer. You have not outsmarted the market. You have refused to send all the money in on the single day you happened to feel brave, which is often a day after a rise. The benefit is behavioural and averaging. It is not a higher expected return than a lump sum that was already sitting in cash on day one. If you have the lump sum and a long horizon, waiting to drip it in is a choice to hold cash, and cash has its own cost.

Twenty months, so the average is visible

Suppose the NAV over five months is ₹20, ₹16, ₹18, ₹22, and ₹20, and you put ₹10,000 in each month. Units bought: 500, 625, 555.56, 454.55, and 500. Total units about 2,635. Total paid ₹50,000. Average cost about ₹18.97 a unit. The simple average of the five NAVs is ₹19.20. You paid less than the simple average because you bought more units at ₹16. That is the entire mechanism. If the NAV had risen smoothly from ₹16 to ₹24, the instalments would have cost more than investing the ₹50,000 at the start. The mechanism does not know which path you will get.

Now put a fee on it

Nothing in the unit count reduced the expense ratio. The fund still deducts its costs inside the NAV. If you chose a fund charging 1.8% over an index fund charging 0.3% on a similar portfolio, the instalment does not refund the 1.5 points. Automating a purchase of an expensive, overlapping fund is an automated mistake. Decide the fund as if you were placing a lump sum — mandate, benchmark, cost, whether it differs from the index — and only then decide the calendar.

Practical choices that matter more than the date

• The date can be your salary date. There is no historically magical day of the month that survives contact with a new sample.
• Missing three months and then ‘catching up’ with a triple instalment after a rise undoes the behaviour you hired the instalment for. If you missed them, resume, or invest the missed amount on the day you notice, not on a hunt for a better price.
• An instalment into a sector fund, a single-country fund you do not understand, or a fund whose document allows a completely different asset mix, spreads the timing risk and leaves the selection risk intact.
• Stop the instalment when the goal’s date arrives and you are moving the money into something with a stable price. Do not keep buying a volatile fund for a bill due in six months because the habit feels virtuous.

What to remember

• An instalment buys more units when the price is low and fewer when it is high. That is averaging, not a raised return.
• A lump sum invested earlier wins on a rising path. The instalment is how you avoid betting the whole surplus on one mood.
• The expense ratio still applies to every unit. Choose the fund before you automate it.
• There is no special calendar date. There is a date you will not tinker with.
• As the spending date approaches, the right habit may be to stop, not to continue.